Friday, June 02, 2006

This relatively recent post by Michael O’Hare led me to this relatively old one. O’Hare lists several characteristics that an ideal system for compensating the producers of creative work would satisfy. For the most part I agree, especially when he’s touting the virtue of good price signals:

(2) Price signals, or something like it, for artists and creators, about what kind of music to make in order to create the greatest net social value. ... Creative people need to know what work is creating more value for society and what isn’t, so they can adjust their output accordingly.

In the departing [i.e., existing] system, these signals are extremely noisy. Everyone has CDs they play again and again, and others they put on the shelf after one try, but both sent the same price signal to the creators and publishers in the form of royalties and sales. If we could get away from a system of charging for possession of a file (iTunes or a physical CD) and start observing plays instead, we would all be better off. But obviously the key to cutting the Gordian knot of filesharing lies in being able to pay creators appropriately even if listeners are not paying directly for music.

Good stuff. But after that nice point, I’m somewhat baffled by this one:

(3) Compensation for artists. Artists of all kinds labor in a vineyard with two curses. The first is that they are trying to do for a living what other people do for fun, so there is constant labor oversupply of a type that does not afflict, say, bus drivers. The second is a “winner-take-all” marketplace of the type described by Frank and Cook with a few overpaid stars and a lot of also-rans, a situation greatly aggravated by recording technology. Despite these hurdles, it’s obviously essential for a society to assure its artists decent incomes so the good ones (not just the few “best”) can be laying down tracks for us to hear rather than waiting on tables or teaching (the correlation between artistic talent and a talent to maximize the competence of student artists is quite modest). Paying artists a living wage is conceptually distinct from the signaling function in (2). [emphasis added]

Is there some reason to think artists have a special need for a living wage that other professions don’t? Supposing that we’ve got the price signals right, which O’Hare says is a distinct issue, then incentives will be in place to generate as much artistic work as the buying public finds valuable. Providing artists a guaranteed living, in a manner unavailable to other professions, would unjustifiably alter the incentives by effectively subsidizing more entry into that profession.

Artistic fields, particularly music, do tend to have a winner-take-all quality. But that is not necessarily a market failure. The large rewards for the big winners, multiplied by the small probability of getting them, create the necessary incentives to enter the field (assuming, again, that the price signals are right).

It is true that winner-take-all markets have greater uncertainty associated with them, and that uncertainty could deter potential artists who would gladly enter the field if given a guaranteed reward equal to the expected value. So maybe there’s a failure of the missing-insurance-market variety. Potential artists would do well to enter “success pools” in which the member artists who eventually hit the jackpot paid the bills of the others. Such pools don’t exist (to my knowledge), presumably because of an adverse selection problem: those artists most likely to join them are those who realize they are least likely to succeed. There could also be a moral hazard problem, as members of pools with successful members get lazy instead of producing more creative work.

But I think these problems are probably unavoidable under any system. Musical potential is inherently subjective and, at least initially, hidden. An alternative system that guaranteed artists a living would have the same problems, attracting lots of low-potential artists to the field and then encouraging them to slack off. The present system in which artists must spend time teaching, waiting tables, etc., provides a useful filter: it weeds out those artists who aren’t sufficiently committed to their craft to pay their dues. These features of the music market ought to be regarded as (partial) solutions to informational and incentive problems.

Furthermore, as O’Hare notes, lots of artists enter the field just for fun. Enjoyable jobs tend to have negative compensating differentials. In this particular field, the differential is felt not in the form of lower monetary pay for the big stars, but in a smaller probability of success and a longer dues-paying period. Moreover, the problem of overconfidence (believing there’s a greater probability of success than there really is) could compensate for the depressing effect of uncertainty in winner-take-all markets.

In any case, my point is not that incentives are great in the status quo. O’Hare gets that part exactly right. My point is that tossing in the “living wage” language confuses the issue. The notion of a living wage, at least in most discussions, has everything to do with distribution and nothing to do with incentives. If a living wage is desirable, its desirability is unrelated to the creative arts as such.